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First time home buyer newcomer tips

For many newcomers, owning a home in Canada is a  source of pride, satisfaction, and accomplishment! And buying a home is also an investment that grows over time and provides a great financial benefit. But before jumping into buying a home, there are some important factors to consider as a first-time home buyer in Canada.

Buying your first home is a big and expensive decision and will likely be the biggest purchase that you make in your lifetime. So you want to ensure that you understand what’s involved because buying a home in Canada can be quite different than in your home country. From the home buying process to the home styles, to the layouts, and the materials, there can be many differences.

Should You Rent or Buy a Home?

Many newcomers arrive in Canada with savings to buy their first home. In fact, a 2019 survey conducted by Royal LePage revealed that newcomers represent a growing segment of the Canadian real estate market. Some of the findings showed that newcomers:

  • represent 1 in 5 homebuyers across Canada
  • live in Canada for about three years before they purchase a home
  • arrive with savings intended to buy a home.

It makes sense that newcomers are eager to enter the Canadian real estate market. Indeed, owning your own home is exciting for many reasons. Homeownership can be a great investment and a way to build personal wealth. Young families may want more space with a backyard for children to play. Or, buying a home in Canada may be an important part of your immigration dream!

But rarely do people have enough money to buy a home outright. And this is where lenders can help you by giving you a loan, also known as a mortgage. But, you will have to have enough savings to pay for a down payment before you can get approved for a mortgage. 

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What’s a Down Payment?

Essentially, a down payment is a portion you put down towards the value of your home right up front. If you don’t have enough for a down payment, you’ll have to build your savings. Your down payment is subtracted from the purchase price of the home and the remainder that you owe is supplemented by a mortgage.

In addition to saving money for a down payment, there are other costs that you will have to pay, such as closing costs. It’s important to factor in the closing costs because they can be costly and often take first-time homebuyers by surprise.

So before you rush into buying a home, it’s important to understand all the costs involved for a first-time home buyer in Canada. 

When Renting a Home Makes Sense

If you have recently arrived in Canada, you’ll discover many things in the city you have landed in. And, you may discover that you love the city and want to make it your home. On the other hand, you may learn that it’s not quite what you had expected. Or, you may land a job in a different city and want to relocate to another region or city in Canada. When you first arrive in Canada, it’s best to continue renting until you’re certain about where you want to live long-term. 

Renting a home versus buying a home makes sense if you:

  • Are not certain where you want to live (what neighbourhood or city?) 
  • Have not yet landed a permanent job
  • Expect your financial situation will change over the next year or so
  • Need time to save for a down payment.

When Buying a Home Makes Sense

A large advantage of buying a house is the sense of pride that comes from owning your home in Canada. In addition, you become a part of a community where you know your neighbours and gain a nice feeling of belonging. And most importantly, you’ll gain financial benefits when you: 

  • Pay down your mortgage over a period of time
  • Create wealth and build equity in your home.

In general, it makes sense to buy a home if you plan to remain in the city for 3 – 5 years or more.  

Three Financial First Steps Before You Buy a Home

Before you become a first-time homebuyer, you need to prepare to meet new financial obligations. And these are three important steps to take before you buy a home:

1. Establish Credit History:

When buying a home as a newcomer, you also have to establish your credit history in Canada. You can begin to build your credit by getting a credit card, or applying for a small loan and making regular payments. 

2. Build an Emergency Fund:

Another important factor to consider before you buy a home is how stable your financial situation is. When you decide to purchase a home, you need financial discipline. For example, it’s important to save money for an emergency fund. When you own a home or a condo, you need to set aside money to deal with unexpected issues such as a leaky roof, basement flooding, or a burst pipe.  Any of these expenses could be thousands of dollars.

3. Save for a Down Payment:

 Most importantly, you need to save for your down payment. However, with as little as just a five percent down payment, along with mortgage insurance, you can actually own your home in Canada.

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What’s the Minimum Down Payment Rule in Canada?

In Canada, the minimum down payment is the percentage of the home’s purchase price. And depending on the house price, the minimum down payment amounts vary.

For example, the minimum down payment is:  

  • 5% for the portion of a home’s purchase price below $500,000
  • 10% for the portion of the purchase price from $500,000 to $999,999 (plus 5% for the value below $500.000)
  • 20% for homes that are valued at greater than $1 million.

Until you have made some firm decisions, it may make more sense to continue renting a home before you buy a home.

Important Questions for First-Time Home Buyers

In addition to thinking about financial first steps, you’ll also need to consider other practical questions such as:

How Much Can You Afford?

As a guideline, financial experts state that you should not pay more than 30% – 32% of your total household income for housing and home-ownership costs such as:

  • Mortgage interest
  • Property taxes
  • Maintenance.

But, that’s a guideline. You may decide that you’ll budget more for housing or, cut back on other discretionary expenses such as entertainment or dining out. Read more about mortgage affordability.

Can You Get Pre-approved for a Mortgage?

A mortgage pre-approval means that a lender has stated that you qualify for a mortgage loan based on your current income and credit history. The pre-approval will indicate the:

  • Pre-approval term (usually 90 – 120 days)
  • Interest rate
  • Mortgage amount.

The lender will assess your financial situation and determine how much they are willing to lend to you to buy your house. This will give you confidence when choosing which homes to consider buying. It will also help when you make an offer on a property because the buyer knows you are serious and able to make the purchase.

What Home is Right for You?

When you’re ready to search for a home, you need to consider:

  • What do you need and want in your house? (number of bedrooms, bathrooms, storage needs, etc)
  • What’s in the neighbourhood? (close to schools, work, shopping, parks, place of worship, public transportation, and other services)
  • What type of house do you want to live in? (condominium, detached or semi-detached home, townhouse, duplex or triplex)

When you answer these questions, you can narrow down your house search to find the ideal home for your needs. You can also provide this information to your realtor who can help you find your ideal home in Canada. Realtors are trained and licensed to help you find and buy a resale property. You may decide to choose an agent who has sold other properties in the areas that you are considering. Or, you may choose a realtor that a friend or family member recommends.

Talk to the realtor about the things that are important to you in a home, but keep a realistic approach. Many Canadians get what is called a “starter home” and then they work their way up the property ladder. Be ready to accept that your price range may not cover all the features you want in a house.

You do not pay for the services of a realtor. Realtors earn their money by keeping a commission on the selling price of the house that they help to sell. The commission is paid by the seller, not by you the buyer.

Closing Costs When Buying a Home

In addition to your mortgage, there are other costs when you buy a home. In fact, there are several closing costs that you must pay before you can take possession of your house. To “take possession” means the home is now legally yours. First-time home buyers are very often surprised when they learn of some of these additional costs. So, here are some examples of closing costs that you can expect to pay:

Appraisal Fee: This is the cost for an appraiser to assess the property value. Your mortgage lender may require an appraisal to determine whether the selling price is reasonable for the market.

GST: You must pay the Goods and Service Tax (or Harmonized Sales Tax) on a newly constructed or substantially renovated home. Resale homes do not require a GST payment.

Land Transfer Tax: This is a tax charged to buyers in most provinces, usually based on the purchase price.

Mortgage Default Insurance: High-ratio mortgages (those with less than 20% down payment) require mortgage default insurance. The cost is usually added to the mortgage it varies depending on the amount of your down payment.

Mortgage Life Insurance: Special insurance coverage to cover the cost of your mortgage in the event of death or severe illness is available from most lenders.

Home Inspection Fee: Hiring a home inspector is voluntary but recommended for resale homes, and usually costs between $400-$600. With the results from an inspection, you may discover issues with the house that may make you back out of your offer altogether. Or the issues may be manageable and could get you a lower purchase price.

Why You Need a Home Inspection When Buying a Home

When you buy a home, it’s important to conduct a home inspection. This is usually done before you make an offer, and the offer is usually conditional upon inspection. When inspecting a house, a home inspector will look for:

Foundation: home inspectors will look to see if there is a leak in a foundation wall and whether insulation is in place. If there’s an active leak, they will determine the condition behind the wall.

Plumbing: an inspector will determine if the drains are installed properly and not leaking.

Windows: the inspector will make sure that the window seals are not damaged. For example, if one of the windows gets fogged, that tells that the window has to be replaced. Next, the home inspector will look at the frame to see if there are any openings that have to be resealed; otherwise, you may get an air leakage.

Furnace: the home inspector will check the quality of the filter and whether it is installed properly. They will check the quality and age of the furnace itself and whether it’s leaking any water inside or gas, which could be very critical.

Mold:  an inspector will also look for mold (or termites) in the house because it can result in significant costs to repair later.

Tips for Newcomer First-Time Home Buyers

Be Informed: Take advantage of free tools and resources to learn about buying a home as a newcomer and learn about mortgage deals for newcomers.

Know How Much You Can Afford: You can use online mortgage calculators that will give you approximate costs, and monthly mortgage payments.

Get a Pre-Approved Mortgage: You can talk to your lender about getting a pre-approved mortgage certificate.

Use a Realtor: There are many different real estate companies in Canada and many agents to choose from.

Get a Real Estate Lawyer: A real estate lawyer will review your purchase agreement contract. The wording in these contracts is very important and your lawyer will make sure everything is done properly in terms of the law.

Prepare a Budget: Plan for your home closing costs, or the costs associated with the date on which you actually take possession of your home.

As a first-time home buyer in Canada, it’s important to learn the essentials and be informed about what’s involved. Homeownership provides great pride, security, and achievement. And when you’re informed about your home buying decisions, you’ll feel confident about moving forward!

For more information, tools, and free webinars about living in Canada visit our Settling in Canada resource page. We’ll help you to settle in Canada successfully!